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Two Consumer Staples groups upgraded to Attractive this month, Beverages and Tobacco. The Energy sector saw Integrated Oil & Gas upgraded to Attractive.

Small Caps are selling at a 17% valuation premium relative to Large Caps (19% last month), using non-normalized trailing operating earnings. The Small Cap sell-off over the last three months has pushed us away from the recent peak premium of 23%.

But Momentum turnover of constituents has altered its characteristics – names are now slightly more defensive, cheaper, and larger.

We look at Short Interest Ratios within the S&P 1500 sectors for clues on future market prospects. The Materials sector is one where it has paid to monitor what short sellers are doing (or not doing).

Growth outperformed Value in all market cap subsets: Large Cap, Mid Cap, and Small Cap. It also snapped a five month losing streak with Cyclicals. Despite the reversal, Growth is still lagging YTD, and is extremely undervalued compared to Value.

Beverages, Tobacco, Department Stores, and Diversified Banks.

As the market found a new leg higher the last two weeks of May, the Cap Weighted and Equal Weighted S&P 500 Indexes had uniform advances—just over 2% for the month. The Equal Weighted Index maintains an 80 bps lead YTD.

In the very short term, excessive bearish positions have been reversed so there is less downside pressure on interest rates. Over the intermediate term, incredibly low yields in the Euro-zone help cap the U.S. yield.

With the Taper underway and the back-up in interest rates over the last year, credit conditions have become less-easy for some consumers and small businesses.

Surprising strength in the Yen, a drop in commodities, and slightly wider credit spreads pushed up the index. An increase in risk aversion becomes more likely at the current extremely low level. Caution is warranted.

Although the overall picture remains favorable for high grade credits, the increased exposure to interest rates with an ever thinner spread cushion does concern us. We will monitor closely for potential downgrades.

YTD Performance: AdvantHedge -4.4%; Global AdvantHedge -3.9% 

Select Industries sold Systems Software; Global Industries bought first Energy group in almost 12 months (Oil & Gas Exploration).

Both Portfolios matched their all-equity benchmarks in May, and are outperforming YTD.

The S&P 500 gained 2.1% (price only) in May. Based on the 1957-to-date valuation metrics presented below, downside to its historical average is -13%, about 1% more than last month’s reading. The S&P Industrials downside to mean valuation (excludes Utilities and Financials) also increased slightly to -26%.

Net outflows for domestic equity mutual funds continued this week, while net inflows resumed for domestic equity ETFs.  Bond mutual funds and ETFs continued to bring in net cash.

The Major Trend Index rose 0.05 to 1.15 in the week ended May 23rd, bouncing sharply off the four-month low recorded in the prior week

The Major Trend Index fell 0.02 to 1.10 in the week ended May 16th.

Domestic equity and money market funds experienced net cash outflows this week, while all other broad categories saw net cash inflows. YTD domestic equity ETF net outflows are the largest on record when comparing to any other year through mid-May.

Despite last Friday’s close in the DJIA at cycle highs, the Major Trend Index for the week slipped 0.04 to 1.12.